Should You Incorporate an HSA into Your Retirement Savings Strategy?

Should You Incorporate an HSA into Your Retirement Savings Strategy?

There are plenty of different options for retirement savings, from the traditional 401(k) and individual retirement account (IRA) to more creative solutions. One of the best options for people who qualify is a health savings account (HSA).

An HSA allows you to deposit money before paying income tax on it and then withdraw it without any fees or taxes, provided that the money is used for qualified medical expenses. While remaining in the account, the money is invested and allowed to grow over time without taxes. An HSA offers significant tax advantages and can play an integral role in saving for retirement, especially in terms of preparing for healthcare expenses.

What to Know about HSAs and Their Potential Benefits

One of the big snags with an HSA is that not everyone qualifies for the account. You can only open one if you have a high-deductible health plan through your employer or a health insurance policy that is otherwise HSA-eligible. These policies generally have lower monthly premiums, but require that you spend more out of pocket before the benefits kick in and start to cover associated expenses. Rules dictate maximum amounts that can be contributed to an HSA each year. If possible, you should put the maximum amount in the account and leave it alone until it’s needed to cover expenses in retirement. Once you start receiving Medicare, you’ll no longer be able to make contributions to an HSA, although you can still use these accounts to pay for medical expenses.

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Notably, people can also use money saved in an HSA to cover expenses not related to healthcare. However, doing so requires you to pay regular income tax on the withdrawals. In addition, you’ll face an additional 20-percent penalty on withdrawals from the account before you are 65 that are not specifically for qualified healthcare expenses. This penalty no longer applies once you reach retirement age, which is part of what makes an HSA such a powerful savings tool for anyone preparing for retirement. Furthermore, HSAs are not subject to required minimum distributions, so the principal can continue to grow throughout your retirement to create a safety net.

Key Things to Consider Prior to Opening an HSA

Currently, some employers offer their employees a company HSA contribution, which is basically free money. Whatever amount is contributed by the employer counts toward the maximum contribution for the year, which is currently set at $3,550 for self-only coverage.

However, you are not restricted to plans through your employer. If you want different investment choices or a plan with lower costs, you can open an HSA on your own, provided that you qualify through your healthcare plan. Typically, it pays to shop around a little bit, since different accounts charge different fees, and there is a wide array of different investing options. is a great tool for finding the right account for you.

HSAs are portable accounts, which is also important when it comes to saving for retirement. You can take an HSA with you when you change jobs and combine it with a new account or keep the old account if your new employer does not offer the option but your health plan still makes you HSA-eligible. Again, it is important to look at fees and investment options before making the decision to combine accounts. Sometimes, it makes sense to keep accounts separate, at least temporarily.

Making the Most of an HSA Before and During Retirement

To use an HSA as a retirement account, it makes sense to contribute as much as possible for as long as possible. Ideally, this means contributing the maximum amount each year. Once you turn 55, you will be able to contribute an additional $1,000 to the account annually in catch-up contributions, which can provide a great boost in the years leading up to retirement. Often, people will encounter restrictions on contributions to an IRA once they start earning above a certain threshold, but there are no such limits with an HSA. This means that an HSA is a great option for people who have already maxed out their contributions to their 401(k) and IRA, although it may make sense for some people to favor an HSA over an IRA if they cannot max out both, since an HSA does not have required minimum distributions.

Once past age 65, most people tend to use an HSA like an IRA, since they no longer face the 20 percent penalty for early withdrawal for non-medical expenses. If you’re withdrawing the money from your HSA for a non-medical purpose after that age, you’ll pay income taxes on it, just as you would on a withdrawal from an IRA. Of course, if you have qualified medical expenses, you can still draw from your HSA tax-free.

Healthcare expenses increase over time in retirement—and the cost of healthcare is rising in general. Having an HSA can be extremely helpful when it comes to paying Medicare premiums, out-of-pocket expenses, and related charges.